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Q3FY11 RESULTS PREVIEW
24% revenue growth expected during the quarter
We expect stocks under our coverage (ex-banking / NBFCs) to report revenue
growth of about 24.5% on a YoY basis. This is partly helped by the scale up in
revenues of Cairn India. Ex - Oil & Gas, revenue growth is expected to be about
22%. Among others, Auto, Capital Goods and IT are expected to propel this
growth. Revenues of auto and IT companies are expected to be driven by volumes.
Higher execution levels should drive revenues of capital goods companies, though
the growth rate is not expected to match up to our coverage average. We will
watch our for execution issues, if any, in construction and capital goods sectors.
Banks / NBFCs under our coverage are expected to post a 26% rise in NII. Credit
growth for banks has picked up to 23.8% (as on December 17, 2010) v/s 11.2% in
the corresponding previous period. However, deposit mobilization is still lagging
the loan growth and has been muted at 14.8% (YoY) as on December 17, 2010.
Moreover, we expect NIM to decline marginally during Q3FY11 vis-à-vis Q2FY11, as
rise in cost of funds due to increase in deposit rates along with some hardening in
the bulk deposit rates would be only partially compensated by the increase is their
PLR/Base rates. However, banks are likely to witness improvement in their NIMs on
YoY basis due to low base in Q3FY10.
We expect brokerage companies under our coverage to report improved results
because of an increase in volumes (more importantly, deliverable volumes) and a
consequent improvement in yields.
Margins are expected to fall for our coverage universe
EBIDTA margins for the companies under our coverage are expected to deteriorate
on a YoY basis. Almost all sectors are expected to experience the pressure as raw
material prices have increased and companies have not been able to pass on the
whole of that increase. Moreover, the rupee has appreciated on a YoY basis and
this is expected to hurt exports (IT companies).
As far as banks are concerned, pre-provisioning profits are expected to rise by
about 21% v/s a 26.6% rise in NIIs. A relatively lower treasury profit is expected to
have an impact. We also expect slippages to remain at elevated levels during
Q3FY11 (especially for PSU banks) in line with last quarter. However, higher
upgrades/recoveries by these PSU banks could provide positive surprises. For private
sector banks, we believe NPA cycle has peaked. Going forward, we expect asset
quality concerns abating on back of improvement in economic environment. NBFCs
are expected to report a growth of about 25.5% in pre-provisioning profits, in line
with the NII growth.
Focus on several concerns
While 3QFY11 results will be important, the focus has been and is expected to be
on some of the other pressing concerns.
Inflation and the expected increase in interest rates will remain a focus point for the
markets. To that extent, stocks of debt heavy companies are expected to remain
under pressure. Also all rate sensitive sectors will be watched with caution by the
markets in the short term, we understand.
The recent developments on the political front and the bribery / telecom licenses
issues are unfortunate. Any lingering effect of these or any such new issues may
further dampen sentiments.
The global economy has been showing mixed signs and the impact of the same has
to be gauged. Opinion is divided on the state of the economy in developed
countries.
Domestically, we will also focus hard on the execution issues, if any, faced by
capital goods and construction companies. In 1HFY11, execution delays had
impacted growth and profitability of these companies.
We will also keep a close watch on the global commodity prices. These are
expected to impact margins in 3QFY11 and consistent increase in the same may
keep margins of corporate India under pressure, if the increases are not fully passed
on. Any lingering impact may dampen sentiments.
We will look at management comments to get further comfort on FY11 revenue
growth and visibility for FY12, if any.
Conclusion
Markets have belied expectations and have been on an uptrend in the past quarter
(However, the past few sessions have seen some profit booking / correction). We
are not very far from all-time highs. Expectations are running high about the ability
of the Indian economy to sustain and improve the growth rates, though some
concerns have recently emerged.
Consequently, corporate revenue growth and profit growth rates are also expected
to be sustained and improved upon.
To that extent, we believe that, markets have priced in these positives which can
come through in the near term. If the markets have to sustain the current levels
and move up in a sustainable manner, it will also need to have more confidence in
the medium-to-long term growth rates of Corporate India. Also, the abovementioned
concerns have to be effectively and immediately addressed.
In case management commentary is able to provide enough visibility and comfort
for the medium term, markets may sustain current levels. However, the room for
disappointment is very limited in our view. Disappointment in earnings or on future
outlook may result in corresponding specific corrections.
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